Panicos Demetriades's picture
Affiliation: 
University of Leicester
Credentials: 
Professor of financial economics
Former Governor, Central Bank of Cyprus and ECB Governing Council member

Voting history

The UK Productivity Puzzle

Question 4: Which of the following policies would be your second choice of policy to boost private sector productivity, in addition to or absent your first choice?

Answer:
Investments in human capital including education and job retraining.
Confidence level:
Extremely confident
Comment:
Clearly education is the most direct way to improve skills and human capital once we first ensure that the best talent isn’t diverted into unproductive activities and speculation. Public investment p in schools and universities is essential to improve human capital.

Question 1: Which of the following was the most important cause for the slowdown in UK productivity growth?

Answer:
(Insufficient) investment in research and development
Confidence level:
Confident
Comment:
Reward structure in the U.K. have traditionally favoured finance relative to more productive sectors. The high rewards in finance have misallocated talent in the sense of Acemoglu (reward structures and the allocation of talent, EER 1995). A paper by James Ang in EER 2011 shows that policies that favour the financial sector divert talent into finance from the R&D sector. Ang uses patent data from 44 OECD countries including the U.K. and 22 non OECD countries. Financial deregulation, by increasing the relative rewards in finance, distorts the allocation of human capital and reduces R&D. This is a largely neglected channel in discussions of the U.K. productivity puzzle.

In the last two questions you are asked which government policies are best suited to help the UK emerge from its productivity growth slowdown. Question 3 asks for your most preferred policy option, while question 4 asks for your second choice. You may use the comment section to outline specific policy recommendations.

Question 3: Which of the following policies would best help improve private sector productivity?

Answer:
Regulatory and competition policies, possibly including financial regulation
Confidence level:
Very confident
Comment:
In the long run, reward structures in finance should be more in line with productive sectors, so that more human capital is attracted to R&D and innovation. Although there has been progress in financial regulation since the crisis, more needs to be done to ensure that talent is more evenly distributed across the economy and that more talent is directed into R&D. Competition policy can help change relative rewards to facilitate that.

Question 2: Which of the following was the second most important cause for the slowdown in UK productivity growth?

Answer:
Human capital including education and employee skills
Confidence level:
Confident
Comment:
See my above analysis - which can justify all three mechanisms at play, human capital misallocation, insuffficient investment in R&D and labour market conditions. On top of that, the crisis and the austerity policies that followed because of the large fiscal costs of bailing out banks have impacted negatively on public capital investments including schools, hispoitals and education, aggravated income inequality and increased uncertainty, eventually leading to Brexit and even more uncertainty. How can we expect private investment that enhances long run growth and productivity after that? It’s important to understand the deeper cause of all this - unregulated finance. Even within economics, the best talent isn’t allocated to understanding this, macroeconomists continue to be ignorant of banks, default and financial regulation.

Labour Markets and Monetary Policy

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Question 2: Do you agree that, in a period of great uncertainty and after a prolonged period of weak real wage growth, monetary policy makers can afford to wait for greater certainty about real wage developments and building inflationary pressure before raising interest rates?

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Answer:
Strongly Agree
Confidence level:
Extremely confident
Comment:
This is not the time to be raising interest rates, the BoE should wait to see how Brexit negotiations unfold. Let’s not forget any inflationary pressures to date have been due to the falling value of the pound because of Brexit uncertainty. If we have a positive outcome, inflationary pressures will recede further.

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